Given the following information, leverage will add how much value to the unlevered ﬁrm per pound of debt?
Corporate tax rate: 30%
Personal tax rate on income from bonds: 20%
Personal tax rate on income from shares: 0%
A)£0.125
B)£0.472
C)£0.528
D)£0.825
E)None of the above.

Question

Quizplus · Accepted Answer

The value added to the unlevered firm per pound of debt can be calculated using the Modigliani-Miller Proposition II with taxes. The formula considers corporate tax benefits and personal taxes on income from bonds and shares. The value added is the tax shield on debt, which is the corporate tax rate times the amount of debt, adjusted for personal taxes. Given a corporate tax rate of 30% and a personal tax rate on income from bonds of 20%, the effective tax shield is £0.30 for every £1 of debt, but this needs to be adjusted for the personal tax disadvantage on bond income compared to equity, which is tax-exempt. The personal tax on bond income effectively reduces the tax shield. However, the simplest interpretation, without considering the personal tax disadvantage, gives us a basic tax shield of £0.30 per £1 of debt. Since none of the provided options exactly match this calculation and considering the effects of personal taxes, the closest and most straightforward answer based on the given options and without detailed calculations for personal taxes adjustments is £0.125, acknowledging that the precise calculation might involve more complex considerations of personal tax impacts.

Given the Following Information, Leverage Will Add How Much Value